Innovations Drive Further Market Opportunities: The Rise Of IEOs
March 2019 Issue
As innovation within the cryptocurrency space continues to march forward, flaws in older processes become more evident and new pathways are forged to keep the wheels of progress turning. The SEC continues to clamp regulation down upon the initial coin offering (ICO) model and investment in ICOs is becoming more and more burdensome, especially to non-accredited investors who are looking to crowdfund a new venture. The initial exchange offering (IEO) opens a window to these investors, bringing them back into the community-based funding methods that have been a hallmark of cryptocurrency since its inception.
Regulation Roadblocks and how the Cryptocurrency Space Resolves Them
The SEC continues to levy regulation upon ICO fundraising methods in the wake of fraud and misuse. A study found that up to 10% of all funds raised through an ICO have been lost to sabotage, misuse, or fraud. Rather than allowing the cryptocurrency space to regulate and police itself, though, the SEC is inviting direct government intervention into the crypto markets to ensure that bad actors do not abuse uneducated investors. In the process, though, they have used troubling, vague language such as “ICOs should pay more attention”, and this has caused a ripple effect in the markets and avenues facing the general public. An example of this is Facebook’s temporary ban on ICO advertising in 2018. In short, the SEC’s posturing has harmed the ICO investment space, both indirectly limiting investor and developer access, and also tarnishing the image of it in the general public’s eye. Though there is no doubt that the SEC’s heart is in the right place, as they do bring the concerns of potential investors up to the forefront, investment and risk are part and parcel with each other, and there are fears of overreach or improperly applied sanctions.
Enter the IEO, which not only gives access back to US investors of all capital levels but also helps alleviate the legitimate fraud and misuse concerns mentioned earlier. IEOs allow developers to sell their tokens to cryptocurrency exchanges, rather than directly to investors. This benefits all three parties involved in the process: the exchange itself, the developers, and the investors. First off, it represents a business opportunity for the exchange in that it can collect listing fees and other proceeds from developers and investors, as well as growing its market share by inviting new users into the exchange. Second, investors benefit from the exchange acting as a guarantor as well as performing due diligence on the developer’s project, which combats concerns of fraud or misuse, ensuring the investor’s capital is put to good use. And finally, the developer benefits as the exchange assumes the role of ensuring regulatory compliance. Exchanges were the first entities in the crypto space to have the burden of KYC and due diligence pressed upon them by regulators, and as such, they already have the most experience handling these responsibilities. Developers will be all too happy to offload these burdensome duties off to the exchange so they can focus on what developers do best: innovate and create. IEOs represents cooperation between all three roles in the space where each group involved can cover the knowledge or accessibility gaps in the others while still remaining fully compliant with laws and regulations.
Already, IEOs have gained traction among exchanges, and are currently available on known exchanges such as Binance, Huobi, KuCoin, LBANK, and Coinbene, which have endorsed prior IEO projects such as Fetch.AI, Bread, and BitTorrent, Inc. ICObench now supports IEO listings as well.
Positive Market Upticks from Healthy Market Growth
After spending several long months languishing below the $4,000 point, Bitcoin has finally once again crested above this watermark. After falling from its five-figure summit and undergoing a rollercoaster of up and downswings, the price has maintained remarkable stability between the $3,500 and $4,000 range since December 2018. While this is not the first time over this timeframe that it has poked above the $4,000 mark, prices have enjoyed remarkable stability in the interim period. Steady, month-over-month gradual progress is a hallmark of healthy, functional growth, rather than the wild speculative swings that were evident in the price graphs from years prior.
Though it would be easy to chalk this up to speculation, previous newsletters have mentioned watching for indicators of a healthy market, which continue unabated this month. As of March 2019, Blockchain, Inc. has shown a peak of over 34 million active wallet addresses, representing a 48% increase from 2018. The overall number of crypto transactions continues to show considerable growth over the past year; confirmed transactions per day lingered under 200,000 per day in March 2018, compared to easily cresting 300,000 per day a year later, and a best-fit line drawn over the count shows an obvious upward trend. What makes this news truly incredible is that the number of transactions continues to increase even as adoption of the Bitcoin Lightning Network grows, which can compress multiple effective user-to-user transactions into one network transaction. The data shows that there is clear interest in not only users holding their coins in wallets, but also the desire to transact with them.
Africa, in particular, has shown higher-than-expected cryptocurrency adoption, which has provided a safe haven from unstable national fiat currencies. The hyper-inflation present in the Zimbabwean dollar made the country a perfect use case for cryptocurrency usage, which not only allowed citizens to protect their investment from said inflation but also opened up avenues for trade that were otherwise not available due to the lack of readily available paper currency. Other African countries have made strides in adoption globally; for example, South Africa, Kenya, and Nigeria now rank sixth, fifth, and third in bitcoin users per capita, placing them much higher than expected given the respective size of their economies.
Providing Space for Innovation
IEOs represent a nimble adaptation to increasingly stringent regulations; with the strong language utilized against ICOs, regulation could represent a chilling effect on developers that work in good faith but hold legitimate fears of undue government interference. However, the regulations placed by the SEC are, for better or for worse, the law of the land. The primary benefits of IEOs are that they do not flout these regulations, but instead ensure that the burden of compliance falls to exchanges, who are the most experienced and capable of ensuring that these regulations are upheld. With the exchanges’ already-proven adherence to KYC and due diligence, investors and developers can breathe easy knowing that these concerns are in good hands. With markets continuing to show increasing health and adoption, developers will be able to focus their efforts on their projects to best meet the needs of the swelling cryptocurrency space.
If you have questions about our fund or would like to be sent investor documents, you can contact our investor relations department at contact@varys.capital.
Regards,
Darius & Saul
Managing Partners
*Article was written March 2019
